KEY TAKEAWAY:

--Attorney representation in commercial auto claims drove a 21% increase in total loss costs in 2019 compared with 2015, and the legal fights are hard to head off: A study by Sedgwick found that of litigated commercial auto claims, 55% of them have attorney involvement before, or the same day as, the report to carrier date.

----------.

Increased attorney involvement in commercial claims is a direct cause of substantial loss ratios, with costs continuing to rise. These growing costs result from high legal involvement rates, social inflation, third-party litigation funding and bad-faith lawsuits filed by attorneys.

How can you protect your business from excessive litigation? Let’s start with a look at the forces behind this growing phenomenon.

The High Cost of Litigation in Workers’ Comp

It’s no surprise that workers’ compensation claims become much costlier when litigation is involved. But just how much more expensive?

Research has found that for workers’ compensation claims with attorney involvement, the average indemnity costs are 390% higher than for unrepresented claims ($77,807 vs. $15,936). The median cost was 740% higher. It’s no wonder that temporary total disability days were 285% higher and claim duration 295% longer than when comparing attorney-involved claims with unrepresented claims.

This isn’t an anomaly: Edward Bernacki and Grant Tao found similar numbers in Louisiana data, and California’s Workers’ Compensation Research Institute tracked the same trends. It is clear that attorney involvement increases claim costs and lost days for the worker by factors of three or more.

Commercial Auto Losing Billions

While combined ratios have been mild in workers’ compensation in the last five years (86.1 to 92.2), in commercial auto they have ranged from 98.8 to 111.1, making auto one of the least profitable commercial lines.

Commercial auto underwriting profit has been steadily declining since 2005. Over the last five years, total underwriting profit (loss) exceeded $22 billion.

Many factors are driving these negative results, but the costliest is litigation. A study commissioned by the American Property Casualty Insurance Association found that attorney representation in commercial auto claims drove a 21% increase in total loss costs in 2019 compared with 2015.

See also: The 'Law' Every Attorney Must Know

Attorneys Follow the Money

Plaintiff attorneys generally view insurance companies as citadels of power with vaults full of money. They see their job as raiding the citadel, unlocking the vaults and giving the money to injured parties (and to themselves). Modern-day Robin Hoods as it were — except the original Robin Hood didn’t take 40% for himself.

Plaintiff attorneys have played this role quite well. And that’s a one-sided view; at the end of the day, policyholders and society suffer from opportunistic litigation. In fact, plaintiff attorney behavior can be considered more in line with the Sheriff of Nottingham taxing society.

A few shocking facts about attorney involvement in commercial claims:*

• The median award for all litigated claims grew 33% to $100,000 between 2012 and 2019, while the mean award rose by 50% to $1.7 million.
• The number of awards to injured parties greater than $1 million granted by juries and judges increased by 235% in 2012–2019 compared with 2005–2011.
• The median of the 50 largest injured party verdicts was $53 million in 2017, up from $26 million in 2014.
• Today, attorneys become involved in claims before they are reported to a carrier at an alarming rate. A study by Sedgwick found that of litigated commercial auto claims, 55% of them have attorney involvement before, or the same day as, the report to carrier date. This measure was at 43% only four years ago. Meanwhile, 67% of litigated claims have attorneys involved within the first 14 days of being reported.

*Source: American Property Casualty Insurance Association

See also: Why Every Insurer Needs a Modern CRM

Judgments Go Nuclear

As the numbers attest, massive judgments in favor of the plaintiff are becoming more commonplace. They are a significant element of social inflation, a trend of many factors affecting premium and loss increases in the insurance industry.

Drivers of these judgments include:

• Cultural attitudes moving toward support of the “little guy,” especially when confronting large corporations.
• Demanding — and worsening — working conditions, enabling litigators to characterize employers as uncaring, insensitive, derelict and abusive. Plaintiff attorneys leverage this trend to sway jurors and judges in their favor.
• In commercial auto lines, the improper use of cell phones while driving, the lowering average age and experience of drivers, the limited availability of truck drivers, and aggressive driving in general contribute to a higher frequency of accidents, often more “spectacular” in nature.

As first published in Insurance Innovation Reporter.

KEY TAKEAWAYS:

--Polls indicate inflation is the number one topic on most people's minds, ranking above violent crime and climate change. Insurers must find ways, including through ads, to illustrate the connection between social inflation and price inflation in a manner relatable to most consumers.

--Carriers must design and implement decision models that identify as early as possible when an attorney will appear on a claim. Some adjusters “know” whether a claim will be represented and whether it will go to trial, but data-driven decision systems, especially those developed with advanced AI, can predict litigation for additional claims outside the range of the adjuster’s knowledge.

----------

There are many ways to quantify the impact of attorney involvement and social inflation (of which attorneys are a significant cause) on insurance carriers. One of the most striking examples is featured in a report by Jim Lynch and Dave Moore of the Casualty Actuarial Society, Social Inflation and Loss Development. The report shows what they calculated as the unexpected paid losses each year.

They find "evidence that social inflation in the 2010s caused paid losses to be more than $4 billion higher than predicted with standard loss development techniques,” including more than $1 billion of unexpected paid losses in 2016 alone.

Source: Social Inflation and Loss Development

The social inflation fire is burning hot and bright. Lynch and Moore estimate that social inflation increased commercial auto liability claims by more than $20 billion between 2010 and 2019. There are good reasons to believe it will continue to do so. The “normal” contributors to social inflation — higher litigation rates, higher jury awards and shifting attitudes about corporations — continue to worsen. And now there is more gasoline on the social inflation fire: third-party litigation funding (TPLF).

See also: Time for Summit With Plaintiffs' Lawyers

Third-Party Litigation Funding

Deep-pocketed law firms, hedge funds, wealthy investors and other interested parties are providing funds up front for litigating complex lawsuits. This amount can be, in large cases, tens of millions of dollars. While such arrangements are characterized as a loan, they are not subject to regulation of any kind.

Here’s how it works: The funding entity fronts the money. If the plaintiff wins, the funder receives his “loan” back and a significant share of the remaining settlement as “interest” for taking the risk of losing. The plaintiff must then also pay his attorney and often winds up with less than he most likely would have received through unfunded litigation, including settling out of court.

What’s the attraction to litigation funding from an investor’s perspective? A report issued by Swiss RE stated that rates of return on litigation funds have been as high as 52% in recent years. That’s much better than recent stock market returns. About $2.5 billion was invested in litigation funds in 2020, which grew in 2021. With returns like those, no wonder all sorts of investors are piling in — hedge funds, large law firms and private investors who work with a TPLF broker. Government retirement funds and college endowments indirectly invest in litigation funding through their investments in hedge funds and other “alternative” investments.

Who pays for this? We all do, in the long run. Insurance companies pass most of their costs to policyholders through higher premiums. Companies and enterprises try hard to pass those cost increases on to their customers. It doesn’t happen automatically, but end consumers (all of us) ultimately pay — not just for the plaintiff’s share of the settlement but also the attorneys’ and funders’ fees and the cost of our court system to support frequent and lengthy litigation.

Protect Your Business from Excessive Litigation

What can insurance carriers do to combat this challenge that excessive litigation plays in the industry and society? Here are two ideas.

Minimize the Effects of Social Inflation

When insurance companies talk to consumers, it’s typically through funny TV ads. When “serious issues” are brought forth, consumers don’t engage. Consumers are more receptive to listening to messages about issues affecting them directly and for which they are concerned. Meanwhile, attorneys’ ads discuss “winning big money for you” and “sticking it to the insurance company.” How can insurance companies compete? 

One possibility is to associate “social inflation” in insurance with the price inflation consumers are confronted with today. Popular polls indicate inflation is the number one topic on most people's minds, ranking above violent crime and climate change. It shouldn’t be tough to illustrate the connection between social inflation and price inflation in a manner relatable to most consumers.

The insurance industry must experiment more with how to convey its message. Insurance carriers have catchy ads; Why not leverage Patrick Mahomes or a cute gecko to “get serious for a moment”?

See also: Misunderstood Role of the Attorney

Use Data as Your Defense

Because litigators get an early jump on all available data associated with the claim incident, carriers must implement a rigorous and comprehensive litigation analytics strategy to close the gap and take this advantage away.

You should start by making your data more usable: cleansed, standardized and accessible in real time. Then, design and implement decision models that identify as early as possible when an attorney will appear on a claim. (You can develop this in-house, but more and more carriers are looking to partner with companies that have developed, implemented and maintained decision systems like these.) Whichever way you go, you need to get going. “Going” means starting with your data. Dig into it and make it usable.

Some adjusters will tell you they “know” whether a claim will be represented and whether it will go to trial. In many cases, they do. But data-driven decision systems, especially those developed with advanced artificial intelligence, can predict litigation for additional claims outside the range of the adjuster’s knowledge. Information is the oil that keeps the “litigation engine” operating — and when wielded correctly, it can be used to minimize or avoid attorney involvement altogether.

Be Aggressive About the High Cost of Litigation

Carriers can tackle the rising indemnity costs of workers’ compensation and commercial auto claims by staying informed about the current strategies litigants are using to seek payouts and by using the wealth of data they already have to better predict attorney involvement in claims.

As first published in Insurance Innovation Reporter.

KEY TAKEAWAYS:

--AI is helping organizations reduce claims processing times from days to minutes. Half of all insurance claims processing activities will be replaced by AI-based automation by 2030.

--AI is playing a pivotal role in reducing fraud. For example, the technology can quickly compare an incident with other cases and assess whether the damage lines up with the amount that is being requested in a claim.

--A digital insurance process can drive a 20% increase in customer satisfaction scores and a 25% to 30% reduction in related expenses, and AI can help organizations provide the digital-first solutions that customers prefer nowadays.

----------

AI is having a transformative effect on the insurance industry, helping organizations with everything from speeding up claims processing to reducing fraud. According to Juniper Research, investments in AI are expected to save auto, property, life and health insurers almost $1.3 billion in 2023, up from $300 million in 2019. 

These savings are helping organizations offer more cost-effective, personalized insurance solutions, resulting in increased customer satisfaction and loyalty. In this article, we will explore some of the key ways AI is making a big difference for financial organizations with insurance offerings. 

1. Automating processes across the insurance lifecycle

Historically, processing a claim has been one of the most time-consuming tasks in the insurance lifecycle, requiring a significant amount of human intervention. Policyholders must call their insurance providers and then wait on hold, or for a call back, before handing over personal information and, eventually, relaying the details of the incident. When too much time passes between the incident and the report, there's a good chance that stress and possible trauma may also distort the recollection of events. 

AI is helping organizations reduce claims processing times from days to minutes. According to McKinsey, half of all insurance claims processing activities will be replaced by AI-based automation by 2030. Claimants can submit damage evidence digitally, and advanced AI algorithms can identify patterns in photos or videos of the damage, check for signs of fraud and predict costs to repair. If the algorithms do not detect any issues with the claim, the result is a faster, more pleasant process for policyholders. Not to mention, a much more cost-effective solution for the insurer. 

According to Accenture, a majority of policyholders view settlement speed as the primary consideration when choosing an insurance product or service. Faster claims processing means faster pay-outs and happier customers.

See also: Key Challenges on AI, Machine Learning

2. Reducing fraud

Fraud is one of the greatest threats to financial companies and insurers. It can also harm policyholders when it occurs too frequently, as organizations need to charge higher premiums to recover their losses and the legal costs of pursuing fraud cases. 

AI is playing a pivotal role in helping reduce fraud in insurance. For example, in the underwriting stage, advanced analytics can help identify signs of fraud. The technology can identify abnormal behavioral patterns or inflated claims by quickly comparing an incident with other cases and assessing whether the damage lines up appropriately with the amount that is being requested. 

Incidents involving vehicle or property damage can be particularly dramatic. The affected parties are not always calm while gathering photo or video evidence. Visual intelligence applications, a specific type of AI, can play an important role here, helping guide the policyholder through the evidence-gathering process. AI-driven applications can help claimants collect credible, accurate evidence, eliminating opportunities to exaggerate or tamper with it before submission. 

Finally, when combined with IoT devices, AI technology can detect any unexplained delays between an incident and the submission of evidence--for example, by examining timestamps and geolocations to determine whether there has been any evidence tampering. 

3. Improving the customer experience

Until recently, trust between an insurance provider and end customers was primarily established through face-to-face interactions.

Consumers nowadays prefer a digital-first process to contract insurance services and resolve incidents in the quickest way possible. The social changes brought on by COVID-19 have also increased the demand for solutions that don’t require an in-person presence. 

According to McKinsey, a digital insurance process can drive a 20% increase in customer satisfaction scores and a 25% to 30% reduction in related expenses. AI can help organizations provide these digital-first solutions. By automating repetitive work, organizations can reduce operational costs and focus more on showing their customers that they’re prioritizing their requests and working toward a solution.

When organizations can personalize their customer support and make the insurance process as simple, transparent and efficient as possible, the result can be a boost in both short-term customer satisfaction and long-term customer loyalty. 

See also: The Importance of Explainable AI

The AI-driven future of insurance 

AI empowers organizations offering insurance-related services with better data and insights to make better decisions. As a result, financial institutions can enhance their insurance offerings, streamline operations, improve customer experiences and maintain competitiveness in this rapidly evolving landscape. As AI advances, we can expect more organizations to onboard the technology to refine their offerings and stay at the forefront of the industry's digital transformation.

KEY TAKEAWAYS:

--Employers should set realistic goals for employees, create incentive programs, celebrate successes, encourage transparent feedback and prioritize health and wellbeing.

--Employers should avoid time-tracking software, which can demotivate employees and lead to burnout.

----------

There are many harmful misconceptions surrounding remote working, including the concern that employees may become less productive while working outside of the office. In fact, Stanford University found that remote working increased workplace productivity by 13%, and that 27% of all full-time days were worked from home in February 2023.

In this article, Weekly10 explores five ways employers can motivate remote workers--and explain why commonly used time-tracking software isn't the answer.

1. Thinking ahead with realistic goals

Employee engagement can be encouraged by setting professional goals. By thinking ahead and setting clear guidelines that coincide with personal development plans, managers and team leaders can help workers achieve their goals.

That said, these goals should always be realistic. If workers do not have enough resources to meet their targets, they may be discouraged from working hard. They may also burn out.

2. Creating incentive programs

Once employers have established realistic goals, they can create incentive programs for the workplace. It can be stressful to meet deadlines and targets, but financial and social rewards are sure to motivate remote employees.

These incentive programs can offer anything that aligns the company and its values, such as commissions, wage increases, profit sharing and bonus payments.

3. Remembering to recognize and celebrate success

A little recognition can go a long way. So, to continue motivating your remote workers, remember to recognize and celebrate their successes. From passing probation to reaching monthly targets, lots of things can be highlighted in the workplace.

Employers can praise employees on video calls, in monthly catch-ups or during team meetings. It's also a good idea to create an achievements channel for this very purpose.

By creating incentive programs and remembering to celebrate success, employers are supporting intrinsic and extrinsic motivational factors. This is motivation that either comes from within an employee, such as happiness and fulfilment in their role, or from beyond, such as through incentives and rewards. These keep the team driving forward while catering to every employee's needs.

4. Practicing and encouraging transparent feedback

Next, transparent feedback is important in the workplace. No matter the nature of the job, employees should understand the successes and potential pitfalls of their performance, which promotes constant growth for remote workers.

However, communication is a two-way street. Employees should feel comfortable voicing any praise or concerns of their own. By conducting frequent one-to-one meetings, employers make team members more likely to feel comfortable sharing their feelings and help them understand the option is there for them to do so.

With this clear line of communication, employers are better able to spot issues, find solutions and help the team develop.

See also: Bring Certainty to Remote Injury Claims

5. Prioritizing health and wellbeing

The health and wellbeing of employees is paramount. If they are suffering from a physical or mental ailment, for example, it will inevitably affect their performance at work. That is why they should feel comfortable confiding in managers and taking sickness leave.

To promote health and wellbeing in the workplace, employers can organize online mental health catch-ups, virtual guided meditation classes and more. Then, in turn, remote workers are more likely to engage with the business.

Why time tracking software ISN'T the answer!

It's easy to consider businesses in a purely quantitative manner. However, companies are made up of people from all walks of life and with various personalities. This means that one method of encouraging engagement, such as time-tracking software, does not always work.

Time-tracking software is a commonly used tool. It allows managers to oversee the daily activities of remote workers, including the level of work being completed at home.

Despite the visibility it gives employers, the software actually reduces the productivity of remote workers. Not only can it put unnecessary pressure on workers to complete tasks, but it can also foster a mistrusting environment that demotivates workers.

It's also unrealistic to expect employees to stay at their desks all day. Employees cannot work at full speed all day, every day without experiencing burnout. Plus, regular computer breaks can prevent eyestrain, musculoskeletal disorders and circulation problems.

Alternatively, employees can measure outputs and impacts with regular meetings, use goal setting to establish clear expectations and build a culture based on trust, rather than using time tracking software.

KEY TAKEAWAYS:

--Medical record review is a classic bottleneck in the insurance process. It's labor-intensive, time-consuming and prone to human error. Early attempts at automation in insurance couldn’t handle the unstructured documents associated with claims.

--The changemaker is today’s AI workflows. They use algorithms that can read, understand and categorize data and route relevant details to people-powered checkpoints and specialized analysis (for example, a physician expert reviewing medical records previously sorted or indexed by an AI). The result is up to 70% faster claims processing, smoother workflows and more accurate results. 

--And the "paperwork revolution" is just beginning.

----------

Paperwork backlogs in insurance have evaded even the savviest of technology solutions. In particular, the processing of unstructured medical documents or cabinets filled with claims data was difficult to automate, so many have kept doing the work by hand.

Now, the technology landscape has changed.

AI has been getting plenty of buzz, and it’s no secret why. The rise of artificial intelligence and machine learning tools has made it possible for humans to accelerate everything from legal proceedings to test prep. However, one of the more powerful uses for AI is often overlooked: processing paperwork.

That might not be as glamorous as a robotic law firm or a self-driving car, but AI’s superhuman ability to sift through pages could well and truly change the game in claims.

More paperwork, more delays

Paperwork is tedious. In claims, it’s also unavoidable. When everything from a patient’s previous medical history to the lead-up to a claim requires documentation, the pages add up. The insurance industry is cautious by nature, so paperwork needing high attention to detail usually gets it—which can lead to time-consuming workflows and a backlog of files. 

Medical record review is a classic bottleneck in the insurance process. It's labor-intensive, time-consuming and prone to human error. Early attempts at automation within insurance, such as automated underwriting or telematics, couldn’t handle the unstructured documents associated with claims. However, relying on manual processes leads to unhappy customers and workflow delay. 

This junction between people and programs is where AI can truly transform. Combining automated workflows and expert input offers accurate results, fast. Removing the manual labor from the medical recordkeeping process isn’t just about making offices virtual (although AI can certainly help); it also means processing medical information in less time. This can do more to improve the customer and patient experience than even the best AI-powered service tools. 

Humans join the loop

The real changemaker is today’s AI workflows, which don't eliminate human brainpower. With people-powered checkpoints and specialized analysis (for example, a physician expert reviewing medical records previously sorted or indexed by an AI), processing more data doesn’t come at the cost of professional expertise. AI tools use algorithms that can read, understand and categorize data, identifying relevant details and making these details easier to retrieve. This means up to 70% faster claims processing, smoother workflows and more accurate results. 

Automatically extracting information from medical records means medical experts and claims handlers can make informed decisions fast. This not only reduces costs for providers but also results in quicker payouts for policyholders, something that could benefit both sides of the bottom line—boosting insurer revenue and lowering cost.

Unlocking the potential of AI 

The paperwork revolution is only beginning.

Today's insurance customer expects a swift, smooth experience from their provider and expects the experts involved in their file review, including physicians or legal professionals, to do a thorough and accurate job. Meeting these two needs in a reasonable amount of time necessitates technology. 

When documents can be processed, sorted, indexed and organized faster than a human can, it opens the door for the expert to pay more attention to each file. This expedites the decision-making process, improving the experience for everyone involved. 

Winning the case on claims processing

The paperwork involved in medical records review is a major hurdle in claims. With a combination of technology and expert inputs, it’s now possible to do more in less time—but what does this mean for insurance as a whole?

The entire industry can enjoy the benefits of smoother document review. Accuracy is essential in complex claims, where small details can add significant hours to a file or alter the outcome of a case. Automating the task of document sorting and indexing makes better use of expert time—so claims can be reviewed both faster and more thoroughly. 

Historically, insurers have been reluctant to move away from a manual workflow. Insurance is an industry based on details, and the complexity of the processes within it have led many organizations to delay the change. Still, there’s no better time than now.

The potential benefits of automation are significant both in terms of hours and cost. The impact AI may have on customer satisfaction could be sizeable, as insurers that can process claims faster and more accurately have a competitive advantage.

The future belongs to those who are willing to innovate—and in terms of medical record review, AI presents an opportunity for insurers to do just that.

KEY TAKEAWAYS:

--Every embedded insurance success I'm aware of satisfies all nine requirements. Otherwise, embedded insurance is like multiplying by zero. The value is nil.

--For one, if the value to the seller or partner is little more than a commission, the insurance becomes a commodity, the commission rises, the value to consumers falls and the product develops a reputation for being scammy.  

----------

Insurance distribution is a $72 billion market in property and casualty and $47 billion in life insurance. Even as margins have been competed out of many industries, profits in insurance distribution have remained consistent or even grown. Hence, it’s no surprise that distributing insurance is seen as an attractive business for many companies outside insurance. 

The vast majority of insurance worldwide is still distributed through traditional channels – captive agents, independent agents and banks – but many insurers are exploring omnichannel approaches based on meeting customers where they are rather than driving customers to agent channels.

Examples:

• “[We intend to] accelerate our efforts to provide customers with personalized solutions in their channel of choice” – president of personal lines at Travelers (source)
• “People buy houses on the internet, right? They buy cars on the internet. There’s really no reason why they shouldn’t buy homeowners insurance on the internet.” – CEO of Allstate (source)

Enter embedded insurance...

A newfangled term describing an ancient concept

"Embedded insurance" is a new Silicon Valley-ism. Yet embedded insurance predates the insurance agent, who is a product of the 19th century Industrial Revolution. Embedded insurance even predates insurance itself. Before insurance existed, an arrangement called bottomry embedded insurance into a marine loan: If the ship was lost at sea, the shipowner did not have to repay the loan. Hence, the interest rate for sea loans was higher than the interest rate for non-sea loans -- often usurious. Abuse of the usury exception by non-mariners led Pope Gregory IX to ban bottomry in 1236. That's when the insurance industry began to form among merchants in the Hanseatic cities, in Lombardy (Italy) and in London -- on Lombard Street, natch. So, yes, embedded insurance predates insurance itself.

In its broadest form, embedded insurance means distribution via any channel other than captive or independent agents, direct response (call centers and websites), aggregators, price comparison websites and lead generation (e.g., affiliate links). That leaves a wide range of concepts that could be embedded insurance, depending on your definition:

• Affinity marketing – selling insurance via associations, groups, etc. 
• Point-of-sale marketing – selling insurance in the flow of selling something else as an opt-in or opt-out
• Providing insurance as part of another product or service, or to people/businesses that purchase another product or service (either included in the product price or opt-in)
• Employer voluntary benefits programs
• B2B2C or distribution to consumers via other businesses

Embedded insurance has been all the rage since some direct-to-consumer start-ups encountered higher-than-expected customer acquisition costs a few years ago. Indeed, a proper embedded offering can be very beneficial for everyone involved, including the consumer. But, like everything in insurance, embedded is easier said than done.

Here are my Nine Requirements for Success in Embedded Insurance. All of the successful embedded insurance offers that I’m aware of have all nine -- or at least a darn good reason why one of the nine doesn't apply. Otherwise, missing any one of the nine is like multiplying by zero – the result is nil.  

See also: Embedded Insurance Is Everywhere

1. Solve a Problem for the Seller/Partner

Embedded insurance is typically insurance sold in the context of some other product or service or buying group. Some examples: 

• Affinity groups: Associations seeking to grow their membership might value having discounted insurance offerings to encourage members to keep paying dues.  Employers might want a shelf of quality voluntary benefits offerings to offer employees.
• Smoothing transactions: A mortgage originator, homebuilder or car dealer might value an insurance offering because their products generally require insurance before a transaction closes (especially if financed), and many consumers turn up without insurance.  
• Improving customer experience: Payroll providers often sell workers' compensation insurance in part because the payroll providers have access to critical data for pricing WC insurance -- who is paid what.
• Solving headaches: By giving customers protection against risks, embedding insurance into a product or service can reduce the potential for customer complaints that damage brands, stress out workers and result in demands for refunds. Think of cruise lines or ski operators embedding accident insurance in their sales processes, so customers have a means of getting a refund if their holiday is spoiled.
• Meeting unique needs: Professional associations sometimes sell their “own” insurance that allows their members substantial control over claims settlements, which can be important for professionals who want to fight bogus claims to protect their reputations, even if the economic cost alone might not justify the fight.

If the value to the seller or partner is little more than a commission, the insurance becomes a commodity, the commission rises, the value to consumers falls (less $$ to pay claims) and the product develops a reputation for being scammy. 

2. Customer purchase occasion

Insurance is a low-interest product, so it’s hard to mobilize consumers to go out and buy it. Hence, an embedded offer needs a purchase occasion for some other product/service where insurance can naturally and easily be attached or inserted. This works where products are simple but becomes challenging in packaged/bundled products and in commercial insurance, where the agent or broker’s consultative role is not easily embedded into a transaction.

3. Unobtrusive insertion point

Embedded insurance cannot be allowed to distract a customer from buying whatever else they intend to buy, lest the insurance become a friction rather than a solution. Thus, underwriting questions must be few, which often means using third party data to customize and underwrite or simplifying the product to a “one size fits most” offer. 

4. Access to unique and relevant data

At the very least, the customer’s identity and basic facts about the consumer or the underlying risk should be known. Ideally, information relevant for rating or product design should be known and provided seamlessly to the underwriter (with appropriate permissions) by the embedded provider. Examples:

• Payroll platforms have information on every employee, their pay and their job – all of which are critical for writing workers' compensation insurance. 
• A gig economy platform might have telematics information on drivers and driver ratings, which could be useful in writing motor insurance.
• For homeowners insurance, a homebuilder should know quite a lot about the homes it builds and the people they sell to, making for a smooth application process and eliminating frictions such as inspections.

However, new data can be friction. Data take effort to be gathered, permissions may be required and ratings algorithms might need to be adjusted. The value of the new data needs to exceed the frictional cost of gathering and processing the data.

5. Breadth of product

Embedded partners want all or most of their customers to get a competitive offer for insurance. This presents two issues for insurers that want to distribute via embedded channels.

(A) Broad and competitive risk appetite. This is somewhat in conflict with the "risk selection" capabilities that every good underwriter has spent years honing. Rejecting a customer or providing an uncompetitive price reflects poorly on the embedded partner. 

(B) Broad licenses. No embedded partner outside insurance cares that U.S. insurance is 57 different state/territory markets, each with its own rules around product design, seasoning and rate filings.

An embedded offer is valuable only to the extent it can serve a large number of customers. 

6. Adjustments to product design, ratings and filings

A smooth integration with an embedded partner is table stakes, but the partner probably also wants unique product features or discounts. Forms may need to be adjusted to reflect a new/different distribution process. Data provided to the underwriter by the partner also have to be considered in ratings. Underwriting rules might need to be flexed to reflect different characteristics of customers that come via partners rather than agents. In admitted insurance, new filings might be required, which can require separate approvals of up to 57 regulators. 

A different type of customer might be attracted by the embedded offer compared with traditional channels. Are they the desired customers or not? How do they react to pricing, coverage options being presented and the design of forms?

7. People who can design, build, underwrite and sell

A person with all four skills is a unicorn! The general manager of an embedded partnership needs to be as close to a polymath as is ever found in insurance, a business that I've argued overvalues specialism. Think of the skills needed in a manager of an integration of car insurance with a car seller. The leader needs to be fluent in both insurance and car selling, including their respective customer journeys, sales processes and IT systems. They need to be fluent in designing a solution, building that solution, underwriting the insurance and selling/negotiating with a partner. Not to mention dealing with all the requirements that I’m writing about here. Try doing that at scale.

See also: A New Approach to Embedded Insurance

8. Reasonable split of the economics

One of the biggest challenges in embedded insurance is the embedded partner demanding too much commission. Take travel insurance. In extreme cases, travel providers take 75% or more of the premium when selling travel insurance, leaving little to do what the product is supposed to do – pay claims to consumers. With so much money to be made in distribution, some travel providers aggressively sell insurance, and few customers actually buy it. That’s a shame, because travel insurance can be an excellent product. But too often the product is attenuated as insurers compete for embedded distribution and pay distributors handsomely. 

9. Enough volume to cover fixed costs

With all the difficulty and complexity of making a successful embedded product, a slick embedded offering might be really cool in a Silicon Valley sense, but it’s only viable if it scales. The required scale depends on the fixed costs each party incurs and the gross margins they generate from the partnership. Often, the minimum efficient scale is higher than the parties realize or takes longer to achieve than the parties have patience for.

***

The insurance industry is moving toward omnichannel distribution, where products are made available in the consumer’s channel of choice rather than requiring the consumer to go through the insurer’s channel of choice. But there are strong reasons why agents came to dominate distribution of insurance globally starting in the mid-1800s – notably their ability to provide specialist expertise, geographic reach, consultative services and a variable cost structure. 

Embedded insurance is surely part of the future of insurance, just as it has been part of the past for millennia. But, as with everything in insurance, embedded insurance isn’t as easy as it might look. Those who figure it out will have a piece of a $120 billion market for insurance distribution (just in the U.S.).

***

Disclaimer

The views expressed are the author's views as of the date of publication and may not consider material economic, market, regulatory and other factors. Certain information has been obtained from sources believed to be accurate and reliable – any of which may be erroneous or change without notice. HSCM has no obligation to update or advise you of any changes or errors. There can be no guarantee that any prediction, projection, forecast, or opinion will be realized. Certain information discusses general information related to the specific industry, activities and trends, or other broad-based economic, market or other conditions and should not be construed as research. The information contained herein does not constitute an offer to buy or sell, or a promotion or recommendation of, any financial instrument or product or strategy. The views expressed may change at any time subsequent to the date of issue hereof. 

KEY TAKEAWAY:

--AI can help brokers improve efficiency, customer service and risk management, creating a competitive advantage.

----------

Artificial intelligence is well on its way to becoming the number one game-changer in insurance. The key will be learning how to use it to maximize efficiency and assist with time-consuming tasks to free industry experts to focus on the areas where they can make the biggest impact—building meaningful client relationships and providing personalized service to exceed the expectations of their clients.

According to McKinsey, “AI and its related technologies will have a seismic impact on all aspects of the insurance industry.” With the rapid pace of technological change, some insurance brokerage firms will inevitably find it difficult to keep up. They will lose ground to competitors that embrace it. 

Some insurance brokers may be concerned that technology will replace them due to the increasing use of AI in underwriting, claims management and customer service. Instead, they should realize how they can use AI to support their growth. Focusing on what it means to be a broker and which activities can only be done by humans is essential, as is understanding how AI-powered tools can absolve them from the mundane, repetitive tasks that take them away from what they should focus on.

Commercial brokers' responsibilities extend beyond transactional duties. They have industry knowledge and the ability to establish trustworthy relationships. AI will not be able to replicate their strategic thinking, negotiating abilities and unique approach, making them essential for navigating complex business transactions.

A valuable partner

AI provides commercial insurance brokers with data-driven insights, streamlines operational processes and helps automate mundane tasks. By adopting such tools and digital platforms, brokers can obtain a competitive advantage, enhance their efficiency and customer service and mitigate their E&O risk. In a nutshell, technology can help brokers thrive in an industry that is rapidly transforming.  

See also: Why AI-Assisted Selling Is the Future

AI supports:

Improved Customer Experience

The most effective use of AI in insurance companies, according to a 2021 PwC survey, is in delivering a more positive customer experience. AI enables brokers to provide faster and more accurate responses to customer inquiries. Additionally, AI-powered analytics help brokers understand their clients' needs and preferences, allowing them to tailor their services accordingly.

Better Risk Management

AI also helps brokers better assess and manage risks. AI can analyze vast amounts of data and identify patterns and trends that humans are not able to see, allowing brokers to make more informed decisions. Additionally, AI helps brokers identify potential fraud and other risks, so they can take steps to avoid them.

Competitive Advantage

Ultimately, by embracing AI, brokers gain a competitive advantage over peers that are slow to adopt the technology. Customers expect highly personalized experiences, and brokers that are tech-savvy can deliver on those expectations faster and more easily and are better-positioned to attract and retain clients.

According to one Deloitte study, only 1.3% of insurance companies are investing in AI. But according to Next Move Strategy Consulting, AI use is expected to grow twentyfold by 2030. 

Fifty-two percent of companies accelerated their AI adoption plans because of the COVID crisis, a study by PwC found. Nearly 86% said AI was becoming a “mainstream technology” at their company.  

See also: Technology and the Agent of the Future

It is the era of digital transformation in insurance. With AI moving full steam ahead, insurance brokers can realize real value from its adoption. They should not shy away but rather embrace it as a tool to improve efficiency, customer service and risk management, creating competitive advantage.

Fear of the unknown is human nature—but there’s no need for fear. Early adopters have a lot to gain, whereas laggards may find it tough to catch up. So, while AI may change the role of brokers in the insurance industry, it will not replace them. Rather, it will allow brokers to focus on higher-value tasks, provide better service to their clients, and build more business than they ever thought imaginable.

The 2023 Atlantic hurricane season officially started June 1 and is forecast to be a busy one, which is why homeowners need to prepare. Yet many lack even the most basic preventative measures, unaware of the risks they face, according to a new survey by Triple-I, in coordination with Munich Re.

The new report, Homeowners Perception of Weather Risks, provides insights into trends, behavior and how experiencing a weather event affects consumer perceptions of future events. 

In the first half of 2023, Triple-I, in coordination with Munich Re, asked homeowners across the U.S. about their experiences with weather-related risks.  Among the key findings:

• Twenty-five percent of respondents don’t expect to be affected by weather risks.
• Thirty-two percent report that they have been affected by weather in the last five years.
• Two primary ways to prepare for weather risk are: creating a home inventory and preparing an evacuation plan in case of emergency. Yet only 47% of respondents have a home inventory and just 52% have an evacuation plan.
• Thunderstorms are reported as the chief weather concern, with 54% citing it nationally. This concern includes flooding and tornados and varies by geographic region. The Midwest leads the area of highest reported thunderstorm risk, with 75% citing it, and the West reports the lowest proportion of concern, at 33%.

The survey suggests awareness and education around flood risk are the greatest opportunity for getting homeowners to take the necessary steps to protect their property. For example, while just 22% of respondents reported understanding their flood risk, 78% of those respondents said they had purchased flood insurance. 

You can find the full Triple-I report here.

KEY TAKEAWAYS:

--San Jose, California, will be a test case. It began requiring liability insurance for gun owners on Jan. 1, 2023.

--It remains to be seen whether gun ownership liability will become the next frontier for insurance companies — though if it does, it could become a big business.

----------

Regardless of where one stands on gun control, it’s no secret that gun violence is a prominent issue in the U.S. — one many agree is worth making policy changes to solve. In fact, some 95% of Americans support some form of restriction on firearm access, according to an April 2023 ValuePenguin survey.

But there could be another way to minimize the threat of gun violence — one that’s compatible with the right to bear arms.

According to that same survey, 75% of Americans believe that liability insurance should be required for gun owners. If such a policy were to be widely enacted, future firearm regulation could end up, at least in part, in the hands of insurance companies.

In fact, this policy is already being tested in one American city.

San Jose passes first U.S. law mandating gun liability insurance

Last year, San Jose, California became the first American city to mandate liability insurance for gun owners. The Gun Harm Reduction Act, which also requires owners of firearms to pay an annual gun harm reduction fee, went into effect on Jan. 1, 2023.

Along with providing coverage for losses, medical costs and deaths due to an accidental use of a firearm — such as a child accessing a gun and unintentionally shooting someone — the liability insurance requirement could encourage gun owners to be more thoughtful about the security of their guns' handling and storage.

Insurance companies often reward safe behavior. For instance, a homeowner might get a discount for installing smoke and carbon monoxide detectors or buying homes closer to fire stations. Car insurance companies also use a driver’s history of accidents and traffic violations, including personal safety measures like seat belt laws, when calculating rates.

In a similar way, gun owners might be given incentives to take a gun safety class or ensure their firearm is kept in a safe. After all, if the gun is lost or stolen, the owner would still be held liable for any damage it caused until they reported the weapon missing.

Gun owners in San Jose who fail to comply with the act will not lose their guns or even be faced with criminal charges. They may, however, face steep fines for their choice to forgo insurance: the penalty starts at $250 for your first violation. If you receive a second violation within a year, the fee jumps to $500. After that, you’ll pay $1,000 every time you receive a violation within a year from your first offense. 

See also: Keys to Limiting Litigation Liability

Could liability insurance prevent gun violence?

The measure is part of a broader movement toward stricter gun control laws in majority-Democrat cities. But detractors say the act may not deter the most common and disturbing type of shooting events in America: intentional ones. 

Liability insurance only covers accidental damages. And in the vast majority of firearm-related injuries and deaths, the shooter was acting with intent, even if that intent was self-defense.

According to the Educational Fund to Stop Gun Violence, unintentional shootings (the kind liability insurance would apply to) account for less than 2% of all gun deaths. Of course, those deaths are still tragic, especially when accidentally inflicted by unwitting children who gain access to firearms stored unsafely. (Everytown Research keeps an index of unintentional  shootings by children; at the time of this writing, there have been 114 of them in 2023 thus far.)

Additionally, many gun owners already have liability insurance coverage for accidental firearms-related damages through their homeowners insurance policy.

Time will tell whether the measure will have an effect on the overall rate of gun violence in San Jose and, thus, whether such a policy stands to help ameliorate the problem in other parts of the country.

Insurance or no, most Americans support gun restrictions

Liability insurance mandates are only one tool in the effort to minimize gun violence, but most Americans agree that some sort of restriction is called for.

Of those surveyed, most support gun restrictions based on documented mental health issues (73%) and criminal history (70%).

Most respondents also supported limitations based on age, proof of gun safety training and proof of safe storage, along with proof of gun ownership liability insurance. Some 41% also supported requiring gun ownership permits, while only 5% of Americans think there should be no restrictions on gun ownership whatsoever.

It remains to be seen whether gun ownership liability will become the next frontier for insurance companies — though if it does, it could become a big business. Almost half of respondents say such insurance should be purchased on a per-gun basis. Although the average gun owner might have just one or two firearms, there’s a not-insignificant class of “super-owners” who own more than a dozen. That’s a whole lot of opportunity for insurers — and, we can hope, a whole lot less needless violence.

My 93-year-old mother was taken by ambulance to the emergency room last Tuesday in the middle of the night, with acute pneumonia, and died Friday afternoon. 

I tell you that partly to explain why I'm being so brief this week and partly to allow me to make a quick point about how much crazy complexity our healthcare system has added in the U.S. We've all become worn down by the cost and complexity, like the proverbial frog in the water that's being brought to a boil, but the issues grab you by the nosehairs when, for instance, you're helping your siblings clean out your mother's apartment and find statements from earlier encounters with the healthcare system.

While I haven't yet seen the bill for my mother's final trip to the hospital, I can imagine what an ambulance ride, a visit to the emergency room and three days in an ICU cost. The bill will be many thousands of dollars, perhaps tens of thousands (covered by insurance, but still...). 

By contrast, what was the bill when she broke her leg skiing in 1955? The break was severe enough that she required an operation and spent a night in the hospital. So, the bill mounted all the way up to $46.60.

The telegram she sent my father cost almost as much as the charge for use of an operating room ($3).

How about the bill from 1967, when my sister Katy was born in the same hospital where my mom died? It was a difficult birth, so my mom and sister spent six nights in the hospital. The entire bill came to $419.75.

I'm not dinging the quality of care by any means. The folks at St. Clair Hospital in suburban Pittsburgh were great, to a person, and my mom felt loved and supported as she left this world behind. She died with her intellect and personality intact and had recently spent a great deal of time with her eight kids, her 17 grandchildren and her three great-grandchildren, including at the weddings of two of the grandkids. She just wore out after a series of health problems. Sign me up for that sort of exit when my time comes.

There is just such a stark contrast between my experience of healthcare today and what I saw in those old bills. The one from 1955 was just a page torn from a notepad, on which someone had used a typewriter to check boxes and to add the dollar amounts (the very small dollar amounts). By 1967, the hospital was using a computer, but the bill was almost as simple as the earlier one. Neither showed any of the elaborate coding that comes with today's bills, as hospitals employ small armies of professionals to make sure they maximize what the insurer and patient will pay -- this, even though I'm sure insurance covered those earlier bills, as my mom worked for United Airlines in 1955 and my dad worked at Westinghouse in 1967. 

I'm not proposing a solution, at least not today. Today, I'm just passing along what I hope was some intriguing historical perspective from the meticulous files my mom kept -- and to maybe rant a little.

My mom's name was Yvonne, by the way. She lived a long and splendid life. Rest in peace, Mom.

Cheers,

Paul